Justin Trudeau, Prime Minister and MP for Papineau, in an interview on April 20, 2017

The United States sold $376 million more in dairy products to Canada than it purchased in 2016. But a trade surplus isn’t an indicator of more or less open trade. No conclusions can be made about which country is more protectionist using this figure alone.

FactsCan Score: True

When President Donald Trump called Canadian dairy rules a “disgrace,” Prime Minister Justin Trudeau turned to numbers.

“The US has a $400-million dairy surplus with Canada,” Trudeau said. “So it’s not Canada that is the challenge here.” Both countries protect their industries, he said, and the trade imbalance between the two countries leaves the United States with the surplus, not Canada.

In response to our query to the Prime Minister’s Office, Oliver Anderson, a spokesperson for Agriculture and Agri-Food Canada, went a step farther and said outright, “Canada’s dairy industry is less protectionist than that of the US.”

Data from both governments confirms that the US exports more in dairy products to Canada than it imports. In 2016, the American surplus was $376 million.

Andrew Novaković, an agricultural economics professor at Cornell University, compiled the numbers below, sourced from the US Department of Agriculture. The table shows net exports to Canada, or the total value of American exports to Canada minus imports.

Trudeau is right. The US sold $376 million more in dairy products to Canada than it purchased in 2016.

Is the surplus a sign of higher protectionism?

A trade imbalance alone isn’t an indicator of more or less free trade. Comparing trade in one item is “fairly meaningless,” said Novaković, even though politicians do it all the time. (He added, “the US has a terrible balance of trade with Costa Rica on bananas. So what?”)

It is a fact that both countries protect their dairy industries, but an American surplus doesn’t rule out higher protectionism in Canada.

Canada protects its industry through a system called supply management that controls dairy production, pricing and imports.

The US has previously guarded dairy products considered vulnerable to imports, said Novaković. The US also provides subsidies, although “the magnitude and precise figure is very difficult to determine given the range and extent of US subsidization,” said Bruce Muirhead, a research chair in egg farming policy at the University of Waterloo. (More on US subsidy programs here).

Dairy is a particularly tough product to analyze because it comes in all forms, and some of those forms like fresh milk are untradeable over long distances, for example from North America to Europe. But there are some ways to judge the openness of a country’s dairy industry.

One is the pattern of trade over time, said Novaković. This is a more qualitative assessment of how trade talks chip away barriers. For example, the US used to have strict import quotas, but replaced it with a more flexible tariff regime (low rates below the quota and high rates above the quota) after the negotiations that created the World Trade Organization in 1995. A Canadian example is the recent deal with the European Union (CETA) which will further open the Canadian market to European cheese.

Another measure is looking at convergence with global prices. Similar prices indicates that countries are competing on a more level field. Dairy prices in the United States have converged over time (see graph below), whereas Canadian prices have not. Canadians pay above global prices for their dairy.

World Farm Gate Milk Prices

Source: The Food and Agriculture Organization

A third measure is the domestic market share that’s open to imports of milk products like cheese, butter, fluid milk and milk powder. The US Department of Agriculture data shows that milk imports were 3.4 percent of American domestic use in 2016. By comparison, imports make up about 5 per cent of the Canadian market, said Muirhead, the same figure cited by Dairy Farmers of Canada. He estimated CETA would add another 3 per cent, for a total share of 8 per cent.

Using this measure, Doyon evaluated a statement that the Canadian dairy market is more open as “very likely true.”

Verdict

Trudeau has the surplus figure right. But he’s not right to imply (or outright conclude) that the Americans are any more protectionist because of it. A number of other indicators are needed to fairly make that kind of assessment.